were computed based on the amount of current assets (those that will be used or consumed within one year) and current liabilities (those that will be paid within one year): current ratio = current assets/current liabilities working capital = current assets – current liabilities.īoth of these figures reflect a company’s ability to pay its debts and have enough monetary resources still available to generate profits in the near future. and the amount of working capital Formula measuring an organization’s liquidity (the ability to pay debts as they come due) calculated by subtracting current liabilities from current assets. For example, previously, the current ratio Formula measuring an organization’s liquidity (the ability to pay debts as they come due) calculated by dividing current assets by current liabilities. In examining the financial statements of a business or other organization, are there vital signs that should be studied as a routine matter?Īnswer: Financial statements are extremely complex and most analysts have certain preferred figures or ratios that they believe to be especially significant when investigating a company. For example, if a person’s heart rate is higher than expected or if blood pressure has increased significantly since the last visit, the doctor will investigate with special care.

The doctor often begins by checking various vital signs, such as heart rate, blood pressure, weight, cholesterol level, and body temperature, looking for any signs of a serious change or problem. This process is somewhat similar to a medical doctor performing a physical examination on a patient. Question: Many individuals analyze financial statements to make logical and appropriate decisions about a company’s financial health and well being. List techniques that an organization can implement to speed up the collection of accounts receivable.Calculate the amount of time that passes before the average accounts receivable is collected and explain the importance of this information.Describe the meaning of the working capital balance.Describe the meaning of the current ratio.Compute the current ratio, the amount of working capital, and other amounts pertinent to the reporting of accounts receivable.At the end of this section, students should be able to meet the following objectives:

Average accounts receivable formula